Overdraft protection may raise fees

Consumers who opt in for overdraft protection of ATM and debit card transactions at some of the nation's largest banks are more vulnerable to increased costs and involuntary account closures, a new federal study reported Tuesday.

The banks have complex and varying practices for handling overdrafts, making it difficult for consumers to determine if they're likely to face extra fees, the Consumer Financial Protection Bureau study found.

Average annual overdraft charges vary so widely among the banks that some consumers paid half as much as others, the study also concluded.

While acknowledging recent progress in bank customer protection, CFPB Director Richard Cordray said "our findings raise concerns about the number of consumers who are incurring heavy overdraft fees or account closures, and the wide variations across institutions."

The findings show certain practices and procedures require further study "to determine whether they are causing the kind of consumer harm that federal consumer protection laws are designed to prevent," said Cordray.

The report, the first data study by the consumer agency since its 2010 creation under the Dodd-Frank financial reform law, was based on data gathered from a small sampling of banks with more than $10 billion in deposits, plus information from public sources and subscription data services. The banks were not identified.

Overdrafts occur when a consumer spends or withdraws more money than is available in an account. If the bank processes the transaction, the consumer may be charged overdraft fees. If the transaction isn't processed, the consumer may face a bill that goes unpaid, along with a possible fee for non-sufficient funds in the account.

A Federal Reserve rule that took effect in mid-2010 bars overdraft fees for ATM withdrawals and most debit card transactions unless a consumer has opted for protection.

Account holders who were heavy overdrafters in the first half of 2010 and did not opt for protection cut their average costs by $453 during the second half of that year, the study found.

The average checking account fees per account-holder totaled $196 in 2011 for those who chose to opt in for protection. The comparable fees came to $28 for those who did not authorize protection.

Involuntary account closure rates also were 2.5 times higher for account holders who opted in for overdraft protection, the study showed.

• Some banks limit the number of overdrafts and non-sufficient funds charges in a single day to two, while others allow as many as 12 such transactions per day or have no cap.

• Consumers face varying overdraft costs, with some banks charging fees on every overdraft transaction, regardless of whether it's large or small. Some banks charge for long-term negative account balances, while others do not.

• Processing of transactions varies widely, with some banks processing larger ones first. That procedure could mean a consumer is "more likely to end up paying multiple overdraft fees on a single day."

Additionally, the study showed average annual overdraft charges by the banks was $225. But some consumers paid $298, while others paid half as much.

Cordray and other CFPB officials said the agency's findings don't indicate that banks and credit unions should be barred from offering overdraft protection. Further study is needed before determining whether the agency should pursue new rules or enforcement measures, they said.

A May report by the Pew Charitable Trusts, a non-profit public policy organization, encouraged the agency "to develop new rules that ensure overdraft penalty fees are reasonable and that prohibit" processing of account transactions in a manner "that has the effect of maximizing overdraft fees."